You’ve found the home you want to purchase and put some earnest money into it. But then you discover that you also must pay a down payment! What’s going on? Was the money you paid previously not the down payment?

While earnest money is not the same as the down payment, they are entwined. Here’s what you need to know about earnest money versus a down payment:

Earnest money is “good faith” money held in escrowbuying a home earnest money

When the seller accepts your offer on a property, you will pay earnest money, showing you’re serious about buying the home. This money is held in an escrow account and will eventually go towards funding the purchase.

Your earnest money deposit is typically 1-2 percent of the purchase price, but always double-check the policies in your state and know how much you can afford.

If you must back out of the contract, the earnest money will go to the seller to compensate for the loss. You can have a refund agreement and contingency in place to help ensure you get that money back, such as an inspection contingency.

Down payment is money paid directly to the seller

Your down payment is the money you put into the house upfront. This money is paid to the seller directly and not to the lender, which means when you borrow money for a home loan, you will only be borrowing for the home after payment.

The amount of money you’ll need for a down payment is determined by a variety of factors, including:

  • Cash available
  • Price of the home
  • Your credit score
  • Your mortgage program

Before  purchasing a home, talk to a trusted mortgage lender. They will help you understand the process and determine the right financing options for you.

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The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.